Contract analysis

1. On June 20, 2022 (the "Petition Date"), the Debtors filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Northern District of Ohio (this "Court"). The Debtors continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Cod

2. The Debtors are leading manufacturers of specialty chemical packaging and industrial containment products, employing approximately 1,420 employees (the "Employees") across four manufacturing facilities located in the states of Ohio, Indiana, and Louisiana, as well as the Debtors' corporate headquarters in Akron, Ohio. The Employees perform critical functions across every aspect of the Debtors' manufacturing operat

3. The Debtors' Employees are the lifeblood of the Debtors' enterprise. They operate complex extrusion and molding equipment, maintain compliance with rigorous Department of Transportation ("DOT") and Environmental Protection Agency ("EPA") containment and safety standards, and carry out the daily manufacturing, quality assurance, logistics, and administrative functions upon which the Debtors' business depends. Many

4. By this Motion, the Debtors seek authority to pay prepetition obligations owed to their Employees, including (a) accrued but unpaid wages, salaries, and commissions, (b) accrued but unpaid employer contributions and premium payments for health and welfare benefit programs, (c) accrued but unpaid workers' compensation premium obligations and self-insured retention payments, (d) accrued but unpaid reimbursable emplo

5. The prompt payment of the Employee Obligations is essential to the Debtors' continued operations and their ability to preserve going-concern value for the benefit of all stakeholders. Without such payment, the Debtors face a serious and immediate risk that Employees will abandon their positions and seek employment elsewhere, resulting in critical disruptions to manufacturing operations at all four of the Debtors'

6. The Debtors' ability to maintain their workforce intact is also essential to the successful consummation of the prepackaged plan of reorganization (the "Prepackaged Plan") that the Debtors intend to file in short order. The Prepackaged Plan, which has been developed in consultation with the Debtors' principal secured creditor constituencies, contemplates the Debtors' emergence from Chapter 11 as going concerns wit

7. This Motion is supported by the Declaration of Dana Kowalski, Chief Financial Officer of Crestline Packaging Solutions LLC (the "Kowalski Declaration"), filed contemporaneously herewith in support of the Debtors' first day motions, which provides additional detail concerning the Debtors' business operations, workforce, benefit programs, and the necessity for the relief requested herein.

8. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference entered by the United States District Court for the Northern District of Ohio dated April 4, 2012 (the "General Order of Reference"), referring all proceedings arising under Title 11, or arising in or related to a case under Title 11, to this Court.

9. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). The Debtors confirm their consent, pursuant to Rule 7008 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), to the entry of a final order by this Court in connection with this Motion to the extent that it is later determined that this Court, absent consent of the parties, cannot enter final orders or judgments in connection herewith c

10. Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409. The Debtors' corporate headquarters and principal place of business are located in Akron, Ohio, which is within the Northern District of Ohio, Eastern Division.

11. The statutory bases for the relief requested herein are sections 105(a), 363(b), 507(a)(4), 507(a)(5), and 541 of the Bankruptcy Code, as well as Bankruptcy Rules 6003 and 6004 and the applicable Local Rules of this Court.

III. BACKGROUND A. General Background

12. Crestline Packaging Solutions LLC ("Crestline") is an Ohio limited liability company with its corporate headquarters and principal place of business located at 4710 Industrial Corridor Drive, Akron, Ohio 44308. CPS Holdings Inc. ("CPS Holdings") is a Delaware corporation that serves as the direct parent entity of Crestline, with its registered agent located at 1209 Orange Street, Wilmington, Delaware 19801, c/o N

13. Crestline was formed in 2007 and quickly established itself as a significant participant in the specialty chemical packaging and industrial containment products market. In October 2017, Crestline was acquired in a leveraged buyout by Thornfield Capital Partners LP ("Thornfield"), a middle-market private equity firm, for an aggregate enterprise value of approximately $410 million. In connection with the acquisitio

14. The Debtors are engaged in the manufacture and distribution of specialty chemical packaging and industrial containment products. The Debtors' core product lines include HDPE drums, IBCs, steel pails, and specialty containment vessels, all of which are designed to meet stringent DOT and EPA regulatory standards for the safe transportation and storage of chemicals, petrochemicals, and agricultural products. The Deb

15. In fiscal year 2021 ("FY2021"), the Debtors generated total revenue of approximately $312.6 million and earnings before interest, taxes, depreciation, and amortization ("EBITDA") of approximately $38.4 million. The Debtors' financial performance deteriorated significantly during FY2021, with revenue declining approximately 18% from FY2020 to FY2021. This decline was attributable primarily to dramatic increases in

16. As of the Petition Date, the Debtors' total funded indebtedness was approximately $247.3 million, consisting of the following: (a) a revolving credit facility with an aggregate commitment of $50.0 million, of which approximately $32.6 million was drawn as of the Petition Date; (b) a first lien term loan in the original principal amount of $175.0 million, with an outstanding balance of approximately $158.7 million

17. The Debtors' financial performance decline and resulting liquidity constraints led to a breach of the maximum leverage ratio covenant contained in the First Lien Credit Agreement, which required the Debtors to maintain a ratio of Total Net Debt to EBITDA (as defined therein) not to exceed 5.75x. As of Q1 2022, the Debtors' actual leverage ratio was approximately 8.50x, materially exceeding the covenant threshold.

18. A more detailed description of the Debtors' business, corporate structure, capital structure, prepetition financing arrangements, and the events leading to the commencement of these Chapter 11 cases is set forth in the Kowalski Declaration, which is incorporated herein by reference. B. The Debtors' Employees and Workforce

19. As of the Petition Date, the Debtors employ approximately 1,420 Employees across their four manufacturing facilities and corporate headquarters. The Debtors' workforce is distributed among the following locations: (a) Akron Headquarters and Plant 1 (4710 Industrial Corridor Drive, Akron, Ohio 44308): Approximately 480 Employees, comprising the Debtors' corporate headquarters operations (including executive manage

20. The Debtors' workforce spans a diverse range of functions and skill sets essential to the continued operation of the Debtors' business. The Employees include salaried management and administrative personnel, hourly manufacturing and production workers, quality control and safety personnel, maintenance technicians, logistics and warehouse staff, and sales and customer service professionals. The Debtors' senior man

21. Many of the Debtors' Employees possess specialized technical skills and knowledge that are directly critical to the Debtors' manufacturing operations. The Debtors' production processes require expertise in chemical packaging manufacturing, extrusion and blow molding processes, quality assurance testing, and compliance with the complex web of DOT and EPA regulatory requirements governing the design, manufacture, t

22. Any significant disruption to the Debtors' workforce would have immediate and severe consequences for the Debtors' business. The Debtors operate their four manufacturing facilities on a continuous or near-continuous basis to fulfill customer orders and maintain production schedules. The loss of even a modest number of key Employees—whether production operators, maintenance technicians, quality assurance specialis

23. By this Motion, the Debtors request entry of an order authorizing, but not directing, the Debtors to pay and honor the following categories of prepetition Employee Obligations in the ordinary course of business, as described in greater detail below. A. Prepetition Wages, Salaries, and Commissions

24. As of the Petition Date, the Debtors estimate that they owe approximately $3.2 million in accrued but unpaid wages, salaries, and commissions to their Employees for work performed during the prepetition period (the "Prepetition Wages"). The Debtors maintain a bi-weekly payroll cycle for all Employees, with payroll processed and disbursed through the Debtors' payroll system. The Petition Date of June 20, 2022, fal

25. The Prepetition Wages include base wages for hourly Employees, base salaries for salaried Employees, and accrued sales commissions for Employees in the Debtors' sales organization whose compensation includes a commission component. The Debtors' hourly Employees constitute the substantial majority of the Debtors' workforce and are compensated on an hourly basis at rates ranging from approximately $16.50 per hour f

26. The Debtors' Employees depend on the timely and regular receipt of their wages and salaries to meet their daily living expenses, including housing, food, transportation, childcare, and other essential needs. Many of the Debtors' Employees—particularly the hourly production workers who constitute the backbone of the Debtors' manufacturing operations—live paycheck to paycheck and have limited financial reserves to

27. Each individual Employee's claim for Prepetition Wages is well within the priority cap of $13,650 per individual established under section 507(a)(4) of the Bankruptcy Code (as adjusted for cases commenced after April 1, 2019, in accordance with 11 U.S.C. § 104). Accordingly, the Prepetition Wages constitute priority claims that would be required to be paid in full under any confirmable plan of reorganization purs

28. The Debtors respectfully request that this Court authorize, but not direct, the Debtors to pay all Prepetition Wages in the ordinary course of business. B. Health and Welfare Benefits

29. In the ordinary course of their business, the Debtors maintain a comprehensive suite of health and welfare benefit programs for their Employees (collectively, the "Benefit Programs"). The Benefit Programs are a critical component of the Debtors' overall compensation packages and are essential to the Debtors' ability to attract and retain qualified Employees in a competitive labor market. The Benefit Programs incl

30. As of the Petition Date, the Debtors estimate that they owe approximately $890,000 in accrued but unpaid employer contributions and premium payments in connection with the Benefit Programs for the prepetition period (the "Prepetition Benefit Obligations"). The Prepetition Benefit Obligations include employer premium contributions for medical, dental, and vision insurance; employer premium contributions for life i

31. The continuation of the Benefit Programs is not merely a matter of competitive necessity; it is required by applicable federal and state law. The Debtors' health and welfare benefit plans are subject to the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), and the Patient Protection and Affordable Care A

32. The Debtors respectfully request that this Court authorize, but not direct, the Debtors to continue the Benefit Programs in the ordinary course of business and to pay all Prepetition Benefit Obligations owed to plan administrators, insurers, and third-party administrators. C. Workers' Compensation Obligations

33. The Debtors are required by law to maintain workers' compensation insurance coverage for their Employees in each of the states in which they operate manufacturing facilities—Ohio, Indiana, and Louisiana—in accordance with each state's statutory workers' compensation requirements. Workers' compensation coverage provides benefits to Employees who suffer work-related injuries or illnesses, including medical treatmen

34. In Ohio, the Debtors participate in the Ohio Bureau of Workers' Compensation ("Ohio BWC") state fund program, which is a state-administered monopolistic system. In Indiana and Louisiana, the Debtors maintain workers' compensation insurance coverage through commercial carriers, specifically through policies issued by Severin Life Insurance The Debtors' workers' compensation programs include both premium payments a

35. As of the Petition Date, the Debtors estimate that they owe approximately $215,000 in accrued but unpaid workers' compensation premium obligations and SIR payments attributable to the prepetition period (the "Prepetition WC Obligations"). The Prepetition WC Obligations include estimated premium payments to the Ohio BWC, premium payments to Severin Life Insurance for Indiana and Louisiana coverage, and SIR obligat

36. Maintenance of workers' compensation coverage is not discretionary—it is mandated by statute in each of the states in which the Debtors operate. Failure to maintain workers' compensation coverage could result in the Debtors being ordered to cease operations at one or more manufacturing facilities, the imposition of significant statutory fines and penalties, and potential criminal liability for the Debtors' office

37. The Debtors respectfully request that this Court authorize, but not direct, the Debtors to continue honoring their workers' compensation obligations in the ordinary course and to pay all Prepetition WC Obligations. D. Reimbursable Employee Business Expenses

38. In the ordinary course of their business, certain of the Debtors' Employees incur business-related expenses in the performance of their duties, including expenses for business travel (airfare, lodging, ground transportation, and meals), office and production supplies, professional development and continuing education, industry conferences and trade shows, and other miscellaneous business expenses. Employees submi

39. As of the Petition Date, the Debtors estimate that they owe approximately $85,000 in accrued but unpaid reimbursable employee business expenses for the prepetition period (the "Prepetition Expense Reimbursements"). The Prepetition Expense Reimbursements consist primarily of travel and entertainment expenses incurred by sales, operations, and management personnel in connection with customer visits, supplier meetin

40. The Debtors respectfully request that this Court authorize, but not direct, the Debtors to reimburse Prepetition Expense Reimbursements in the ordinary course of business. E. Payroll Taxes and Withholdings

41. In connection with the compensation of their Employees, the Debtors are required by applicable federal, state, and local law to withhold certain amounts from Employee wages and to remit such amounts, together with the employer's share of applicable payroll taxes, to the appropriate taxing authorities. The payroll taxes and withholdings for which the Debtors are responsible include the following: (a) Federal Incom

42. Amounts withheld from Employee wages for federal, state, and local income taxes and for the employee's share of FICA taxes constitute trust fund obligations held by the Debtors in trust for the benefit of the applicable taxing authorities. As trust fund obligations, these amounts are not property of the Debtors' bankruptcy estates under section 541 of the Bankruptcy Code. See Begier v. Internal Revenue Service, 4

43. As of the Petition Date, the Debtors estimate that they owe approximately $610,000 in accrued but unremitted payroll tax withholdings and employer payroll tax obligations for the prepetition period (the "Prepetition Payroll Tax Obligations"). The Prepetition Payroll Tax Obligations include both trust fund amounts withheld from Employee wages and the Debtors' employer-side payroll tax obligations.

44. The timely remittance of payroll tax withholdings is not merely a matter of sound business practice—it is a legal imperative. The Internal Revenue Code imposes a trust fund recovery penalty under 26 U.S.C. § 6672 (the "Trust Fund Recovery Penalty") on any "responsible person" who willfully fails to collect, account for, or pay over trust fund taxes. The Trust Fund Recovery Penalty may be assessed against the Debt

45. The Debtors respectfully request that this Court authorize, but not direct, the Debtors to remit all Prepetition Payroll Tax Obligations, including trust fund withholdings and employer payroll tax obligations, in the ordinary course of business. F. Paid Time Off, Vacation, and Sick Leave

46. The Debtors maintain paid time off ("PTO"), vacation, and sick leave policies for their Employees (the "PTO Policies"). Under the PTO Policies, eligible Employees accrue PTO based on their length of service and employment classification. PTO accrual rates generally range from 10 days per year for Employees with less than three years of service to 25 days per year for Employees with 15 or more years of service. Th

47. As of the Petition Date, certain Employees have accrued but unused PTO and vacation balances. Under the laws of certain states in which the Debtors operate, accrued but unused PTO and vacation time is considered earned compensation that must be paid out upon an Employee's termination or separation from employment. For example, under Louisiana law, upon termination of employment, an employer is required to pay all

48. The Debtors respectfully request that this Court authorize, but not direct, the Debtors to continue honoring their PTO Policies in the ordinary course of business, including the payment of accrued prepetition PTO upon usage or upon an Employee's termination or separation from employment, as required by applicable state law and the terms of the PTO Policies. G. Summary of Estimated Prepetition Employee Obligations

49. The following table summarizes the Debtors' estimated prepetition Employee Obligations for which relief is sought in this Motion:

50. The Debtors request authority to pay the foregoing Employee Obligations in the ordinary course of business, subject to applicable priority caps under the Bankruptcy Code and the limitations set forth in the Proposed Order. The Debtors submit that the aggregate amount of approximately $5.0 million is reasonable and necessary to maintain the Debtors' workforce and operations during these Chapter 11 cases.

V. BASIS FOR RELIEF A. Sections 363(b) and 105(a) of the Bankruptcy Code

51. Section 363(b)(1) of the Bankruptcy Code provides, in pertinent part, that "[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." 11 U.S.C. § 363(b)(1). Courts have uniformly recognized that section 363(b) empowers a debtor in possession to make payments on prepetition claims where such payments are supported by a sound business

52. Section 105(a) of the Bankruptcy Code provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a). This broad equitable power enables the Court to authorize payments of prepetition claims where such payments are necessary to facilitate the successful reorganization of the debtor's business and the preservation

53. Courts routinely authorize the payment of prepetition employee wages and benefits pursuant to sections 363(b) and 105(a) where, as here, such payments are necessary to preserve the debtor's workforce and the going-concern value of the estate. See, e.g., In re Wehrenberg, Inc., No. 20-44561-399 (Bankr. E.D. Mo. 2020); In re Briggs & Stratton Corp., No. 20-43597-svk (Bankr. E.D. Wis. 2020); In re Pyxus Int'l, Inc.,

54. The "doctrine of necessity," sometimes referred to as the "necessity of payment" doctrine, provides an additional and well-established basis for the relief sought herein. Under this doctrine, a court may authorize payment of prepetition claims where such payments are essential to the continued operation of the debtor's business. See In re Lehigh & New England Ry. Co., 657 F.2d at 581 ("The necessity of payment do

55. Here, the payment of the Employee Obligations satisfies the business judgment standard applicable to transactions under section 363(b). The Debtors' management, in the exercise of their sound business judgment, has determined that the payment of the Employee Obligations is necessary to (a) retain the Debtors' approximately 1,420 Employees, who are essential to the continued operation of the Debtors' four manufact